JUL 16 UniCredit Friday Notes

16 July 2010 Economics & FI/FX Research
Friday Notes
Contents
Germany: Moderate austerity measures Weekly Comment____________________________ 2
Research Notes _____________________________ 4
Data Monitor_______________________________ 14
■ Consolidation. The German government has finalized its austerity package. FI Outlook_________________________________ 20
It intends to reduce spending by a total of EUR 81.6bn or just over 3% of FX Outlook ________________________________ 22
GDP – albeit spread over four years. Furthermore, the government CIB View _________________________________ 24
CIB Forecasts _____________________________ 25
raised mandatory social security contributions. Calendar__________________________________ 28
■ Structure. At just over EUR 30bn, a large part of the cuts are to the welfare
CIB MACRO FORECASTS
budget. Business (incl. banks and the nuclear power industry) is to contribute
close to EUR 20bn. Administrative spending should be reduced by EUR 13bn, in % yoy 2009 2010 2011
while subsidy cuts total roughly EUR 10bn. GDP EMU -4.1 1.0 1.3
CPI EMU 0.3 1.5 1.8
■ Assessment. The German austerity package is quite balanced. It should
GDP Germany -4.9 1.8 1.5
be enough to successively lower the current record-high deficit and over
CPI Germany 0.3 1.1 1.6
the medium term help the government to comply with the ambitious debt
rule anchored in the Basic Law. On the other hand, it is moderate GDP Italy -5.1 0.9 1.0
enough, above all in the critical coming year, not to stifle the recovery of CPI Italy 0.8 1.6 1.9
domestic demand (pages 4-6 & chart below).
GDP US -2.4 3.0 2.4
■ Forecast. Nevertheless, German economic growth will lose momentum. CPI US -0.3 1.8 2.2
Next year, real GDP will expand by only 1.5% (2010: +2% unadjusted). CIB FI/FX FORECASTS
That is, however, primarily attributable to the phasing-out of the inventory
2010/11 30-Sept 31-Dec 31-Mar 30-Jun
cycle as well as the fiscal stimulus program. The global economic slowdown
EMU 3M (%) 0.95 1.20 1.28 1.35
will also be a burden.
EMU 10Y (%) 3.00 3.25 3.45 3.50
■ Criticism. The Achilles Heel of the consolidation is the questionable US 3M (%) 0.60 0.75 1.05 1.55
implementation of some of the measures, like the bank levy, as well as US 10Y (%) 3.40 3.80 4.20 4.30
the heightened economic risks and the possible liabilities stemming from
domestic & international guarantees. In any case, the government could EUR-USD 1.24 1.22 1.20 1.18
have been much more courageous in slashing subsidies. USD-JPY 91 95 100 106
Oil Price 78 85 80 80
■ Further topics:
– Weekly Comment: A startling comeback for the EUR (page 2).
– US: The next stimulus package – aid for the states (page 7).
– Crude oil: Market well supplied in 2011 as well (page 11).
– Data outlook: Purchasing managers become more cautious (p. 14).
– Market outlook: Euro to remain firm for the time being (page 22).
Global Head of Research & Chief Strategist
Thorsten Weinelt, CFA (UniCredit Bank)
GERMANY'S MODERATE AUSTERITY MEASURES
+49 89 378-15110
2011, in % of GDP thorsten.weinelt@unicreditgroup.de
Head of Economics & FI/FX Research

Marco Annunziata, Ph.D. (UniCredit Bank)
Greece
Chief Economist
+44 20 7826-1770
Spain marco.annunziata@unicreditgroup.eu
UK Editor
Nikolaus Keis (UniCredit Bank)
Portugal +49 89 378-12560
nikolaus.keis@unicreditgroup.de
France
Editorial deadline
Friday, 16. Jul., 12:00H
Italy
Bloomberg
Germany UCGR
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Internet
www. research.unicreditgroup.eu
Source: Thomson Datastream, UniCredit Research
UniCredit Research page 1 See last pages for disclaimer.

Friday Notes
A startling comeback Be that as it may, we have a paradoxical situation where,

while the recovery is clearly more robust in the US than in
the eurozone, the Fed sounds more dovish whereas the ECB
The EUR has staged a remarkable rebound over the last
sounds cautiously more optimistic. Consequently, expectations
month, recovering from below 1.20 to the dollar to nearly 1.30.
of a Fed rate hike are likely to be pushed further into the future,
What is driving it? Will it strengthen further, consolidate, or
whereas short-term rates in the eurozone begin to edge up.
reverse trend? And should its appreciation be welcomed?
Remember that excess liquidity had pushed short-term rates
towards zero, un-anchoring them from the policy refi rate. If they
The euro’s appreciation against the US dollar this time is
now start converging to the refi, we have potentially close to
probably a tale of two economies: on the one hand, markets are
¾ of a percentage point in “stealth” tightening that can occur
perhaps starting to believe that, as ECB President Trichet
spontaneously without the need for the ECB to hike.
noted last week, the eurozone should not be underestimated.
Trichet pointed out that, while the ECB was not changing its
Moreover, investors are probably starting to get some
staff forecasts (which are very close to ours, cf. the table at
encouragement from the policy actions taken by European
the end of this publication), the incoming data did not in any
policymakers. Here the important role, in my view, is played
way support the pessimistic fears that the region might be
not so much by the actions of eurozone institutions, but
about to plunge back into recession. The ECB forecasts, like
rather by national governments, where significant steps have
ours, suggest a lackluster recovery, but Trichet was very
been taken towards fiscal consolidation and, at least in the
clear in indicating that risks to this outlook might perhaps be
case of Spain, structural reforms. Nothing earth-shattering so
skewed to the upside. Contrast this with the dovish tone of
far, but certainly enough to give pause and consider whether
the latest FOMC minutes, where several committee members
at least some eurozone governments might now finally realize
expressed concern that deflation risks might materialize, and
the need for long-overdue reforms.
suggested that the Fed should keep open the possibility of
stepping up its quantitative easing program. This stands in
A particularly encouraging sign in this regard has been the
sharp contrast to the attitude of the ECB, which has insisted
recent recovery in demand at some government bond auctions,
that its government bond purchases do not constitute quantitative
notably in the case of Spain, where China’s wealth manager
easing as they are fully sterilized, and has allowed its 12-month
SAFE showed concrete and substantial interest. This is
liquidity to expire, resulting in a substantial draining of excess
potentially a very positive sign. In the immediate aftermath of
liquidity from the system and an upward move in short-term
the Greece shock, large Asian investors stepped back in horror
market rates. President Trichet was careful in pointing
from a eurozone sovereign bond market which they no
out that this should not be seen as a sign of change in
longer recognized, and tried to come to terms with the need
the bank’s monetary policy stance, as the ECB continues to
to understand much better the idiosyncrasies of the different
offer unlimited liquidity at shorter maturities; he implicitly
national markets which for most of the eurozone’s history
acknowledged, however, that this might represent an early
had traded very close to each other. SAFE’s demand for
sign of normalization in financial markets, which the ECB
Spanish bonds suggests that perhaps the panic phase is
would be happy to accompany.
over, and Asian investors have now had time to do their
homework and more carefully assess individual countries’
The Fed’s deflation concerns are, in my view, exaggerated,
risk. And if they find that Spain’s risk is tolerable, then it
even though there is no doubt that the recovery is losing
might well mean that the risk of a systemic crisis is indeed
some momentum in the second half of the year as the push
quite moderate.
from fiscal stimulus and the inventory cycle wanes, in line
with our forecasts, and recent data revisions suggest that the
Next week, however, we have a crucial reality check with the
first half of this year was also weaker than previously
first release of the European stress test results, and preliminary
thought. The Fed itself is still forecasting growth of 3-3½%
indications are at best mixed. On the one hand, as I have
for this year, and even if 2H growth were to be somewhat
pointed out in the past, it is extremely encouraging that Spain
lower than our forecasts, say in a 2-2½% range, it would still
has taken the initiative and first announced it was going to
be a fairly respectable performance for an advanced economy
publish the results of its stress tests, regardless of what other
which is still licking its wounds after a very serious crisis. The
countries did, and then indicate it would extend the tests to
problem of course is unemployment, which remains at very
cover the large majority of its banking system. On the other
high levels, and which will decline only very slowly if GDP
hand, the Committee of European Banking Supervisors
growth remains weak. Unemployment is currently the major
(CEBS) has not yet been able to tell us much about the
political issue in the US, and unless and until its trend is more
assumptions used in the tests, raising concerns that at least
decisively reversed, whether by stronger private confidence or
on the crucial issue of sovereign bonds, individual countries
by another government stimulus program, the Fed cannot
might end up using different methodologies or assumptions.
afford a more hawkish stance.

Friday Notes
All we will learn in a week’s time will be the aggregate results

by country, whereas the results for individual financial institutions,
which are the ones investors need to separate the sheep
from the goats, will only follow with a 2-3 week delay. We
should at least hope that the announcement on the overall
results and on the assumptions used is sufficiently detailed
and convincing, or it might undo the good work done so far.
What does this all mean for the euro? I think the upside
potential at this stage has probably been exhausted, as the
fact that the stress test results will be disclosed in two
rounds, with the second taking place when the summer holiday
period is in full swing in Europe, suggests that the chances of
a very positive surprise are slim. On the other hand, with US
growth losing steam and the Fed toying with the idea of a
new wave of quantitative easing, it will take a major negative
surprise in the eurozone to knock EUR-USD back below 1.20
and at this point this seems extremely unlikely over the coming
few months – with the greatest risk lying, in my view, in the
stress test exercise, which has become a very high stakes
game. The exchange rate therefore seems most likely to
remain stable for a while, and this probably suits both the
eurozone and the US, neither one of which would welcome a
significant appreciation in this new nervous climate where
countries suspect each other of engineering competitive
devaluations to pursue export-led growth.
Marco Annunziata, Ph.D. (UniCredit Bank)

44 20 7826-1770
marco.annunziata@unicreditgroup.eu

Friday Notes
PLANNED BUDGET CONSOLIDATION IN 2011, IN % OF GDP

German budget: Appropriate
consolidation plan
Greece
■ In the current year, new public debt will hit a new record Spain
level of presumably over EUR 100bn. That should, however,
UK
also clearly mark the peak with a deficit ratio of roughly 4½%.
Portugal
■ The federal government has reached agreement to start
France
the budget consolidation next year. The results of the austerity
discussions as well as the agreement to raise social security Italy
contributions are – together with the economic recovery –
Germany
to successively lower the deficit.
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
■ Even though the uncertainties concerning the budget remain
high, the plans appear appropriate: No precipitous deficit Source: National statistics, UniCredit Research
reduction that chokes the domestic economy, at the same
time, adequate cuts to comply with the stipulations of the
Implementation of the consolidation package also remains
debt rule.
very vague on some key items. The extension of the operating
life of nuclear power plants, which via an additional levy is to
Consolidation starts next year generate revenues from next year of EUR 2.3bn annually,
When, after the coalition government’s austerity meeting a remains controversial. There is as yet no concrete concept
few weeks ago, Chancellor Merkel extolled to the public the for the levy. At the moment, there is even discussion of an
virtues of an ambitious consolidation package totaling more auction process similar to the auction of the mobile phone
than EUR 80bn or more than 3% of GDP, there was initially licenses. Above all, the participation of the banking sector in
confusion about the high level of the resolved austerity the costs of the financial market crisis also remains uncertain.
measures. The details of the plans do, however, reveal the From 2012, this is to generate annual revenues for the federal
expected and - compared to many other EU countries - more budget of EUR 2.0bn. According to Finance Minister
moderate size of the consolidation package. In contrast to Schäuble, however, it makes no sense for Germany to go it alone
the cited cumulative amount for the coming four years, the with a capital market levy. And the recent G-20 summit in
budget deficit is to be reduced during the current legislative Canada did not reveal any willingness for a uniform international
period by a total of "only" EUR 27.6bn (see table). agreement. In contrast, the need for approval for the austerity
plans from the Bundesrat (Upper Chamber), in which the coalition
parties no longer have a majority since the election defeat in
RESULTS OF THE AUSTERITY MEASURES, IN EUR BN
North Rhine-Westphalia, is only limited to just a few measures.
2011 2012 2013 2014

Record high deficit in 2010
Subsidy cuts 2.0 2.5 2.5 2.5
Corporate participation 3.3 5.3 5.3 5.3 Together with the tax projection in May, the draft budget recently
Welfare adjustments 3.0 7.0 9.4 10.9 approved by the cabinet for 2011 and the medium-term fiscal
Armed forces reform - - 1.0 3.0 plan up to 2014, the information situation on the expected
Administrative savings 2.3 3.3 3.9 3.9 development of the budget has improved substantially despite
Other measures 0.6 1.1 1.7 2.0 the still persisting uncertainties. After a federal deficit last
Total 11.2 19.1 23.7 27.6 year of 3.1% of GDP, it was originally feared the deficit would
81.6 balloon this year to as much as 6%. The recently very brisk
Source: Federal Ministry of Finance, UniCredit Global Research recovery in industry and especially the related still surprisingly
solid situation on the labor market have, however, improved
the prospects of a tangibly lower deficit. And this is despite
The planned consolidation volume for the 2011 budget totals the Growth Acceleration Act passed by the new federal
EUR 11.2bn or 0.4% of GDP. In numerous other EU countries, government, which since the beginning of this year increases
the austerity plans for the coming year are many times the budget gap by a further roughly EUR 8.5bn per year.
higher (cf. chart next column). The direct negative impact on
growth as a result of the German austerity program should,
therefore, be relatively limited.

Friday Notes
For 2010, the government now assumes a federal budget WELFARE CONTRIBUTIONS EXCEED 40% LEVEL AGAIN
deficit of EUR 65.2bn. At the middle of last year, the Grand
Coalition still expected a deficit of EUR 86bn. Furthermore, Nursing
45 Unemployment
the recently still robust economic data and the ongoing decline Pension
40
in unemployment mean a further downward revision of the Health
35
deficit forecast for this year is likely. Nevertheless, the deficit
30
should be at a record-high level. And together with the
25
expected high deficits of the states, local authorities and also
the welfare system, the overall budget deficit this year will 20
probably still climb to over EUR 100bn or close to 4½% of 15
GDP (cf. chart). 10
OVERALL BUDGET BALANCE, IN EUR BN 0

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Federal government States

60 Source: Federal government, UniCredit Research
Local authorities Welfare system
40 Total
20
In addition to the austerity measures, the current economic
0
recovery should also have a clearly positive impact on the
-20 budget from next year. The incremental spending and reduced
-40 revenues because of the economy will, on the assumption that
-60 the global economy and therefore also the export-oriented
-80 German economy will not slide into a double-dip recession,
-100 successively decline. Based on its tax estimate, the federal
-120
government expects the budget to improve by a total of more
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010p than EUR 10bn by 2013. The states and local authorities will
also profit from this. The clear trend reversal in the monthly
Source: Ministry of Finance, Städte- und Gemeindetag, UniCredit Research revenues from the corporation tax (see chart) also points to
an end of the decline in revenues from the communal business
tax (Gewerbesteuer), by far the most important source of
New debt clearly lower in 2011 revenue for local authorities. All in all, we expect a sizeable
From the coming year, however, the deficit should clearly decline in the overall deficit ratio to 3.3% of GDP next year.
decline again. In addition to the planned consolidation measures And in 2012, the budget could already comply again with the
in the federal budget resulting from the austerity agreement, Maastricht criteria.
the government has also agreed on steps to reduce the gaps
in the welfare system. Alongside a rise of the contribution TAX REVENUES, IN % YOY, SMOOTHED
rate for unemployment insurance from 2.8% to 3.0%, the
contribution rate for statutory health insurance will be raised Wage and income tax
60
at the beginning of 2011 from 14.9% back to 15.5% of gross Corporation tax
40
income. Both contribution rates had previously been lowered Value added tax
during the crisis as part of the economic stimulus program at 20
the expense of federal subsidies. As a result, a large part of 0
the current gap in the welfare system is being closed. In return,
-20
however, the factor labor is being taxed more heavily again.
-40
In 2011, the combined burden on employees and employers
will, therefore, again exceed the 40% mark (cf. chart -60
next column). -80
-100
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
Source: Federal ministry of finance, UniCredit Research

Friday Notes
Consolidation plan appropriate

The consolidation path adopted by the federal government
remains fraught with substantial uncertainties with respect to its
ability to implement some key measures and with respect to
the economy, and not least because of the existing guarantees
for the banking system and EMU high-risk countries.
Furthermore, a stronger focus on reducing subsidies would
have been desirable. The extent of the planned measures
does, however, appear appropriate. There is no precipitous
reduction of the deficits that could choke off the recovery of
the domestic economy, also in the context of substantially
higher austerity programs in many neighboring countries. At
the same time, the measures are almost enough to comply
with the stipulations of the debt rule anchored in the Basic
Law, according to which the federal government must limit its
structural deficit to 0.35% of GDP by 2016.
Alexander Koch, CFA (UniCredit Bank)

+49 89 378-13013
alexander.koch1@unicreditgroup.de

Friday Notes
The next stimulus measure: Accordingly, the Federal Reserve Bank of San Francisco
wrote in a current report, "in many respects, fiscal conditions
More aid for the states [of states] are likely to get worse before they get better.”2
■ For most US states, fiscal 2011 started at the beginning Revenues have plummeted
of July. It will presumably be even more difficult for them
than in the previous year to adhere to balanced-budget laws. The primary cause of the states’ budgetary plight is plummeting
tax revenues. They fell 8¾% between the beginning of 2008
■ First, state budgets remain under pressure due to the still and 2009 (cf. chart). The only other decline in state & local tax
high unemployment rate, which keeps state tax receipts receipts reported in the last 60 years occurred in 2001/2002
low and increases demand for health care and other and was a much more moderate 1¾%. When interpreting the
essential services that states provide. data, it must be borne in mind that it already includes measures
implemented to ensure a balanced budget – such as tax
■ Second, in the past two years it was still possible to partly increases. Without these steps, the decline in tax revenues
close the budget shortfalls by tapping into state reserves would have been much stronger.
and through federal aid provided in the American Recovery
and Reinvestment Act. But both sources have now been DRAMATIC SLUMP IN TAX REVENUES
virtually depleted.
State & local authority tax receipts, in % yoy
■ States have to close a USD 140bn budget gap in the current 20
fiscal year. Without further aid from Washington, the
necessary cutbacks could shave close to one percentage 15
point off GDP growth and eliminate close to one million jobs.
10
States’ budget plight will continue 5
to deteriorate initially 0
On 1 July, fiscal 2011 began in 46 of the 50 US states. And

-5
even though the recession already ended at mid-2009, the
states’ fiscal problems will continue into the next fiscal year -10
and likely beyond. Following previous recessions, state fiscal I/50 I/55 I/60 I/65 I/70 I/75 I/80 I/85 I/90 I/95 I/00 I/05 I/10
recovery lagged behind the economic improvement: While,

for example, the recession of the early 90s ended in March 1991, Source: BEA, Thomson Datastream, UniCredit Research
the states reported their largest budget deficits in fiscal 1992.
And while the recession in the early part of the current decade As already mentioned, the expenditures of the state and local
ended in November 2001, state fiscal distress persisted into authorities also increase at times of crisis. The most important
fiscal 2005.1 The main reason for this time lag is that the items are rising unemployment benefits and ballooning
unemployment rate continued to climb after the recession health care (Medicaid) costs for residents who lost their jobs,
ended and then remained high for a considerable period of income, and health insurance. The Center on Budget and
time after that. That hampers the ability of state revenues to Policy Priorities (CBPP) estimates that in fiscal 2009 and
recover strongly, as high unemployment reduces both 2010 the states had to plug budget shortfalls of USD 110bn
income and consumption tax revenues. At the same time, and USD 200bn, respectively (cf. chart next page).3 The
the higher demand for Medicaid and other essential social number for 2010 is equivalent to close to 1½% of US GDP.
services increases states’ expenditures. The problem is that
every state save Vermont has some sort of balanced-budget
law. In the last two years, the states were still able to close
part of their shortfall by tapping into state reserves or through
federal aid to states provided in the American Recovery and
Investment Act (ARRA). Both sources have, however, now
been virtually depleted. That means that the need for spending
cuts and/or tax increases is rising further.
2
Gerst, J. and D. Wilson, Fiscal Crises of the States: Causes and
Consequences, FRBSF Economic Letter 2010-20, 28. June 2010.
1 3
Additional Federal Fiscal Relief needed to help States address Recession’s Recession Continues to batter State Budgets; State Responses could
Impact, Center on Budget and Policy Priorities, 1 March 2010. slow Recovery, Center on Budget and Policy Priorities, 27 May 2010.

Friday Notes
HUGE BUDGET GAPS AUSTERITY MEASURES HURT GROWTH
State budget shortfalls, in USD bn Consumption and investment expenditures of states & local
authorities, growth contributions in percentage points
250
Budget gaps offset by ARRA 1.2
Remaining budget gaps after ARRA
200 1.0
0.8
150 0.6
0.4
100 0.2
0.0
50
-0.2
-0.4
0
2009 2010 2011 2011 -0.6
I/00 I/01 I/02 I/03 I/04 I/05 I/06 I/07 I/08 I/09 I/10
Source: CBPP, UniCredit Research

Source: BEA, Thomson Datastream, UniCredit Research
In the last two fiscal years, federal aid provided in the American
Recovery and Reinvestment Act has allowed states to close The austerity measures have also left their mark on the labor
about a third of their budget gaps. The funds have been market. Since mid-2008, the states and local authorities have
channeled primarily into the budgets for education, health eliminated a quarter of a million jobs (cf. chart). The pace of
and public safety. Without this massive support, the states the job cuts accelerated strongly in mid-2009.
would have been forced to slash their expenditures even
more drastically and to raise their tax rates even more A QUARTER OF A MILLION FEWER JOBS
strongly than they have already done. In addition, the states
have thus far been able to tap into reserves (rainy day funds), State & local authority employees;
cumulative change since August 2008, in thousands
which they had accumulated in preceding years. According
to the CBPP, these reserves totaled 11.5% of annual state 0
spending before the onset of the crisis, making them the

largest reserves on record. But the unusual severity and -50
length of the recession means that even these reserves have

now been largely depleted. Hence, the states now have to -100
plug their budget gaps even more strongly via adjustments to

their current revenues and expenditures. The latest GDP -150
numbers provide a foretaste of the possible ramifications.

They show that the consumption and investment expenditures -200
of the states and local authorities have fallen in five of the

last six quarters. At the beginning of 2010, they shaved as -250
Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10
much as half a percentage point off GDP growth (cf. chart
next column).
Source: BLS, Thomson Datastream, UniCredit Research
As stated, all these steps were necessary in the past months

despite the aid from Washington and despite the possibility
to tap reserves. Furthermore, the above statistics only reflect
the direct impact of the states’ austerity measures. They neither
include the public-sector orders not awarded to businesses
and suppliers nor the second-round effects on capex spending
and consumption.

Friday Notes
Even more austerity measures needed What cannot be quantified is the impact on the general quality
of life, since the layoffs affect such important positions as
The ARRA funding is scheduled to expire at the end of 2010, teachers, firefighters, police officers, and waste management
i.e. right in the middle of the current fiscal year. Implicitly, personnel. Furthermore, the spending cuts affect primarily
however, the states had hoped that at least the payments for the poor and needy.
the Medicaid program (Federal Medical Assistance Percentages
(FMAP)) would be extended for another six months. According
to the Congressional Budget Office, this extension would have
The (multi) trillion dollar gap
saved the states about USD 16bn.4 30 states had firmly The analysis thus far does not take into account the problems
integrated these funds into their budget plans, since the of the state-sponsored pension plans. According to estimates
House had already voted in favor of extending the FMAP, of the highly-respected PEW Center on the States, the state
and President Obama included the additional funds in his pension funds reported assets of USD 2.35 trillion at mid-2009.
budget. At the end of June, however, the Senate voted against This compared with liabilities (promised healthcare and other
this plan! That means the states will have to impose additional retirement benefits) totaling USD 3.35 trillion. The states’
cuts to eliminate the new shortfalls. At least 45 states have pension funds, therefore, have a gap of one trillion USD!7
already reduced services since the recession began. Many of The PEW Center emphasizes that the investment losses during
them have particular ramifications for vulnerable populations:5 the Great Recession account for only a portion of this shortfall.
Many states fell behind on their payments even before the
– At least 30 states have implemented cuts that restrict
crisis, as they preferred to use the funds to cover current
low-income children’s or families’ eligibility for health care
expenditures, e.g. for education, health care, public safety
insurance or reduce their access to health care services.
and other critical needs. Professors Robert Novy-Marx and
– At least 25 states are cutting programs for the elderly and Joshua Rauh estimate that the states’ pension funding gap even
disabled (e.g. medical, rehabilitative or home care services). totals more than three trillion USD. They argue that the present
value of future liabilities is clearly underestimated, as it is
– At least 30 states are cutting aid to K-12 schools and
calculated using an unreasonable discount rate of 8%.8 If
various education programs.
instead a risk-free interest rate, like the interest rate on
– At least 41 states have cut assistance to public colleges T-Bills or bonds is used, the present value of the
and universities, resulting in reductions in faculty and already-promised pension liabilities of the 50 states amounts
staff, in addition to tuition increases. to more than 5 trillion USD (cf. chart next page)!
At the same time, many states are attempting to boost Since the underfunding of pension plans is now becoming more
their revenues: obvious while at the same time more and more baby-boomers
are nearing retirement, the first states were compelled to
– Since the beginning of the crisis, more than 30 states
tackle the problem. Ten states have so far raised the retirement
have raised taxes, sometimes quite significantly.
age or lowered the benefits for new employees, while ten
Increases have been enacted or are under consideration
other states increased the contributions that current and future
in personal income, business, sales and excise taxes.
employees make to their own benefit system. These
– Furthermore, many states are planning to increase taxes increases are – as David Rosenberg, former Chief Economist
on cigarettes or beverages. of Merrill Lynch emphasizes – a de facto tax hike that will
slow the recovery of household spending. If, however, the
These and further measures are necessary as the states’
states refrained from further contribution increases, they
cumulative budget shortfall (after deducting the ARRA funds)
would have to offset the pension gaps from the current
will likely reach USD 140bn in the current fiscal year. That is
budget, which in turn would entail spending cuts elsewhere
the largest gap on record and translates into close to 1% of
and/or tax increases. The states are, therefore, in a tricky
nominal GDP! According to a rule of thumb used by the
situation that will probably get worse in the coming years.
Council of Economic Advisers, each percentage point of
Ultimately, there will presumably be no alternative but to also
GDP translates into roughly one million public and private
cut the benefits promised to existing employees – even though
sector jobs.6
the constitution of many states currently does not allow such
a step.
4
What States and the Economy lost when the Senate Jobs Bill failed,
Center on Budget and Policy Priorities, 24 June 2010.
5 7
An Update on States Budget Cuts, Center on Budget and Policy Priori- The Trillion Dollar Gap – Underfunded State Retirement Systems and
ties, 25 May 2010. the Roads to Reform, PEW Center on the States, February 2010.
6 8
Romer, C. and J. Bernstein, The Job Impact of the American Recovery Novy-Marx, R. and J.D. Rauh (2009), The Liabilities and Risks of State-
and Reinvestment Plan, 9 January 2009. Sponsored Pension Plans, Journal of Economic Perspectives, 23(4), 191-210.

Friday Notes
MASSIVE UNDERFUNDING OF STATE PENSION PLANS The risk for this outlook is, however, clearly skewed to the
downside. First, the recent Senate resolution against extending
State pension funds: Assets and liabilities in USD trillion
unemployment benefits and the FMAP demonstrated that
6.0 resistance to the ballooning federal debt is increasing in
Assets Liabilities
Washington. Second, the budget problems of the states (on
5.0
top of that, there are the problems facing local authorities)
4.0 could be substantially greater than estimated so far. Spending
3.2tr
cuts and layoffs would then trigger a downward spiral that
3.0
1.0tr would choke the fragile recovery. Finally, potential bankruptcies
2.0 of some local authorities could bring further writedowns. The
resulting tensions on financial markets would, in turn, have
1.0 the potential to hurt growth via a negative feedback loop.
0.0
PEW Center on the States Novy-Marx and Rauh (market-based
Dr. Harm Bandholz, CFA (UniCredit Bank)
discount rate) +1 212 672-5957
harm.bandholz@us.unicreditgroup.eu
Source: PEW Center, Novy-Marx and Rauh, UniCredit Research
Hopes pinned on Washington

After making considerable cuts in the past two years, the
states must again plug a USD 140bn budget gap in the current
fiscal year. Without further aid from Washington, the necessary
steps could shave close to one percentage point off GDP
growth and, in the process, eliminate close to one million jobs.
The administration in Washington has stressed repeatedly in
recent weeks and months that the stabilization of the economy
and the creation of jobs have absolute priority. Against this
backdrop, further massive transfers to the states are arguably
the easiest, quickest and most efficient stimulus the federal
government can launch. With mid-term congressional elections
looming in November, it probably won’t be easy for the
opposition to oppose such a bill, since with an unemployment
rate running at close to 10% most voters will undoubtedly
give preference to the prospect of more jobs over reducing
the federal debt. Furthermore, extending the transfers to the
states does not even have to be labeled a "stimulus". In our base
scenario, we therefore assume that further funds will flow to
the states. We even assume that government expenditures
as a whole (federal plus states & local authorities) will
increase by ¾% in the current year after ½% in 2010. This is,
of course, still substantially less than in the last three years,
when public-sector expenditures increased on average by
more than 2%.

Friday Notes
IEA CONSUMPTION ESTIMATE REVISED UP BY ALMOST 3 MB/D!

Crude oil market well supplied
94
■ The International Energy Agency (IEA) indicates that demand 2009 MTOMR
2010 MTOMR
for oil is adequately covered up to and including 2015. 92
Nevertheless, it is not possible to sound the all-clear for

90
the oil market.
mb/d
88
■ Demand estimates were raised by 3 mb/d compared to
the previous year. The primary reasons for this are the 86
strong growth in emerging markets.

84
■ OPEC’s free production capacity remains very high. It is 82

adequate to offset the decline in the output of exhausted 2009 2010 2011 2012 2013 2014 2015
fields, cover the growth of emerging markets and smooth

out short-term delivery disruptions. Source: IEA MTOMR 2010, UniCredit Research
■ The report does, however, also reveal three weak spots.

First, the production of conventional petroleum from already
Adequate oil supply up
exhausted fields declines considerably – a heavy burden The second important finding is that global crude oil production
for increasing global crude oil production going forward. capacity will be more than adequate to meet the high
consumption growth. In its 2010 MTOMR, the IEA assumes
■ Second, the non-OPEC countries can no longer offset the that the free production capacity will increase from 91.0 mb/d
decline in output from conventional oil fields, thereby in 2009 to 96.5 mb/d in 2015. The bulk of this capacity
increasing dependence on OPEC. The production increase expansion comes from OPEC. Here, the crude oil production
comes primarily from the increase in the production of biofuels, capacity is expected to increase by 1.9 mb/d. On top of that,
NGL and non-conventional petroleum. there is an increase in the NGLs (= Natural Gas Liquids such
as, for example, propane, butane) of 2.6 mb/d. The free
■ We are retaining our target price for 2010 of USD 80 production capacity of the non-OPEC states, in contrast,
per barrel, but we are lowering our target price for 2011 increases by only 1.0 mb/d. Over the entire period, the free
from USD 90 to USD 80 per barrel (in each case calendar production capacity of OPEC remains relatively high. 5.8 mb/d
year averages). are expected for 2010. But this already marks the peak. By 2015,
it is expected to decline again towards 4 mb/d (cf. chart).
Demand for crude oil expected to
increase strongly FREE PRODUCTION CAPACITY OF OPEC REMAINS HIGH
Every year at the end of June, the International Energy

7
Agency (IEA) publishes its MTOMR. It discusses the prospects OPEC spare capacity
5.8
for the petroleum and natural gas market for the next five 6
5.3
5.5
years. The report is then updated each December. An initial 5

4.4
important finding of the 20110 MTOMR is the again substantially 4.2
4 3.5 3.6
higher growth now projected for petroleum consumption. Up
mb/d
to and including 2014, demand is expected to increase from 3

84.77 mb/d to 90.99 mb/d (cf. chart next column). That is an
2
increase of roughly 3 mb/d compared to the 2009 MTOMR, which
was, however, written under the impact of the financial crisis, 1
when the DAX, for example, was still trading at 4,600 points. 0
2009 2010 2011 2012 2013 2014 2015
Source: IEA MTOMR 2010, UniCredit Research
The scenario does, however, have one important weak spot:

A strong decline in production from old, already exhausted
fields must be permanently replaced.

Friday Notes
This becomes very visible for non-OPEC countries, where CHANGE IN NON-OPEC OIL PRODUCTION BY 2015
capacity expansion is covered almost entirely from
non-conventional sources. 1
Non-OPEC: composition of the additional supply up to and including 2015
0.8
0.8 0.7
0.6
Decline in production from exhausted 0.4
0.4
fields is a major strain 0.2 0.1

0
mb/d
Forecasting oil production is very difficult and depends on -0.2
three important assumptions. First, naturally, it depends on the -0.4
-0.6
development of already discovered oil fields. That problems -0.8
can repeatedly arise here is demonstrated by the Kaschagan -1
-1
oil field, with estimated reserves of 9-16bn barrels one of the -1.2
Conventional Biofuels Other NGLs Refinery
last major discoveries, where the start of production had to be crude supply unconventional processing
postponed from 2005 to 2012. Second, the crude oil price is sources gains
decisive, since it is only with a high oil price that the development
of more expensive deposits becomes feasible. Third, and going Source: IEA MTOMR 2010, UniCredit Research
forward perhaps even more importantly, the IEA must make
an assumption of the decline in output from exhausted fields.
But this increase has its price. Just over 50% of this year’s
Depending on the oil field, the decline in production can be
corn harvest is being used to produce bioethanol. On the
between -1% and up to -30% (!!) per year in offshore fields.
other hand, the US wheat acreage has fallen from 28mn hectares
The 2010 MTOMR assumes a decline of 5.1% per year. In
in 1990 to now 19mn hectares. The wheat price has,
the 2009 MTOMR, the assumption had still been -5.8%. The
nevertheless, not increased, because the Eastern European
improvement is, however, attributable solely to the higher oil
countries were to some extent able to fill this gap by expanding
price, lower costs and resumed capital spending. This means
their wheat production. The other components are the
a decline in production of the non-OPEC countries of 1.9
production of NGL, which by 2015 is to increase by 0.4 mb/d,
mb/d and for OPEC of 1.2 mb/d. Offsetting the decline in
and the production of petroleum from non-conventional
production totaling 3.1 mb/d per year presents the petroleum
sources, e.g. from deep water. Above all, this part could become
industry with an enormous challenge. Above and beyond
problematic in the coming years. If the Deepwater Horizon
that, the production capacity is also to be increased from
disaster in the Gulf of Mexico were to result in delays or even
91.0 mb/d in 2009 to 96.5 mb/d in 2015 to satisfy demand
the complete abandonment of projects, by 2015 production
growth from emerging markets! The sensitivity of petroleum
must be expected to decline by between 300 kb/d and 800
production to the decline in mature fields is enormous. If the
kb/d. A further problem is that the increase in non-OPEC oil
decline in production were only 0.5 percentage points higher
production is in the years 2010 and 2011. By 2015, production
per year than estimated, the projected petroleum production
is then expected to merely stagnate.
of the non-OPEC states in 2015 would be 1.0 mb/d lower.
OPEC surplus holds oil price in check

Unconventionals must fill the gap
For us, the 2010 MTOMR highlights that the high free
The IEA expects that by 2015 the non-OPEC countries can
production capacity of OPEC will keep the oil price in check
increase their crude oil production by roughly 1.0 mb/d. The
up to the end of 2011 (cf. chart next page). With 5.8 mb/d, it
2009 MTOMR still expected a decline (!) of 0.4 mb/d. The
is high enough to offset the decline in production from
non-OPEC countries do not, however, succeed here via the
exhausted fields, cover the growth of emerging markets, and
production of conventional petroleum. Quite the contrary:
balance out short-term delivery disruptions. This applies all
The decline in output from the exhausted oil fields is already
the more since the non-OPEC contributions to global oil
so strong that it can no longer be neutralized even by new
production will come to market primarily in 2010/2011. The
projects in the conventional field. By 2015, conventional
decline in production of conventional petroleum in the
petroleum production will decline by 1.0 mb/d. The main support
non-OPEC countries does, however, remain problematic.
for the increase is production is instead the increase of
This can be offset only by biofuels, NLGs and deepwater oil.
biofuel production, which in turn can be attributed primarily to
All three alternatives are, however, problematic. We are
US ethanol production (cf. chart next column).
pessimistic primarily when it comes to further deepwater projects.
Many believe that the oil catastrophe in the Gulf of Mexico
will do to deepwater oil production what the Chernobyl disaster
did to the nuclear industry. This increases the dependence
on OPEC.

Friday Notes
OPEC’s unofficial target price is USD 70-80 per barrel, and

we expect OPEC will have no difficulty in defending this target.
The remaining imponderables are geopolitical tensions and
an acceleration of the decline in output from exhausted
fields. We are lowering our target price for 2011 from
USD 90 to USD 80 per barrel, but we are retaining our target
price for 2010 unchanged at USD 80 per barrel (in each case
calendar year averages).
OPEC’S HIGH FREE PRODUCTION CAPACITY KEEPS OIL

PRICE IN CHECK
8 160
Free production capacity of OPEC Crude oil, Brent (RS)
7 140
6 120
USD per barrel
5 100
mb/d
4 80
3 60
2 40
1 20
0 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Bloomberg, UniCredit Research
Jochen Hitzfeld (UniCredit Bank)

+49 89 378-18709
jochen.hitzfeld@unicreditgroup.de

Friday Notes
Data Monitor Europe – Preview of the coming week
Thursday, 22 July
EMU, PMIs PMIS: (MODERATE) EASING TREND
July CIB Cons. June May 65

Expansion
Manufacturing PMI 54.9 55.2 55.6 55.8
60
Services PMI 55.0 55.0 55.5 56.2
55
The moderate softening trend of the PMIs should continue
50
in July. In manufacturing, the new orders-to-stock ratio is
off its peak, but doesn’t hint at a collapse in activity further 45
down the road. For July, we expect the factory PMI to 40 Manufacturing PMI
ease to 54.9. The services index should follow suit and
Services PMI
settle at 55. After a strong 2Q, GDP growth momentum 35
Critical level
Contraction
is bound to slow in 2H 2010. 30
01/99 01/01 01/03 01/05 01/07 01/09
Source: Thomson DataStream, UniCredit Research
FRANCE, BUSINESS CONFIDENCE THE PEAK SHOULD BE BEHIND US
July CIB Cons. June May 120 40

95 95 95 97
110 20
Manufacturing confidence is likely to move sideways in July,

100 0
after the moderate decline recorded in June. Manufacturers
have been revising downward production expectations 90 -20
at industry and in-plant level, in line with our projections
for a deceleration in the pace of industrial activity in 3Q. 80 -40
We will watch closely developments in foreign orders to Business confidence

70 -60
gauge the pace at which this deceleration is likely to Production outlook (RS)
unfold in the coming months. 60 -80
01/02 01/03 01/04 01/05 01/06 01/07 01/08 01/09 01/10
Source: INSEE, UniCredit Research
UK, RETAIL SALES A STRONG 2Q
June CIB Cons. May Apr 4
in % mom 0.6 0.6 0.6 0.0 3
2
Surveys of retail sector activity remained strong in June.
Retail sales therefore are likely to post another strong 1
gain in June (our forecast is 0.6% mom). For the quarter 0

as a whole, retail sales should mark a sizeable rebound
-1
after the sluggish performance reported in 1Q. Prospects
-2
for the second half of the year, however, are cloudier as
Retail sales (in % mom)
the announced austerity measures should weigh on -3
Retail sales (3M rate of change, in %, smoothed)
consumer sentiment. -4
01/99 01/01 01/03 01/05 01/07 01/09
Source: ONS, UniCredit Research

Friday Notes
Friday, 23 July
GERMANY, IFO BUSINESS CLIMATE EXPECTATIONS HAVE PEAKED
July CIB Cons. June May Ifo indices (2000=100)

Index 101.5 101.5 101.8 101.5 120
Overall climate
115
Expectations
In the previous month, the forward-looking business Current conditions
110
expectations posted their second decline after sixteen
105
consecutive gains. The global trend reversal in the leading
100
indicators also points to a further cooling off of the prospects
95
for German businesses. The strong order situation at the
moment could, however, even improve the situation for 90
the time being. Overall, we expect only a moderate pullback 85

in the Ifo index as a whole at the beginning of the second 80
half of the year. 75
1995 1997 1999 2001 2003 2005 2007 2009
Source: Ifo, UniCredit Research
FRANCE, CONSUMER SPENDING AUTOS DROP OUT OF THE PICTURE
June CIB Cons. May Apr 4.0 8.5

% mom 0.8 0.4 0.7 -1.3 3.0 7.0
2.0 5.5
Spending is likely to show a further acceleration in June,
1.0 4.0
thanks to a revival in expenditures on clothing (due to
the start of the holiday season) and autos (as hinted by a 0.0 2.5
firm increase in car registrations). Our forecast, if confirmed, -1.0 1.0
would leave spending on manufactured goods barely flat -2.0 -0.5

on the previous quarter, underpinning only a moderate -3.0 -2.0
acceleration in overall private consumption in 2Q, following -4.0 consumer spending (in % mom) -3.5
the stagnation recorded in 1Q. consumer spending (in % yoy, RS)
-5.0 -5.0
01/06 01/07 01/08 01/09 01/10

Friday Notes
UK, REAL GDP UPBEAT GDP READING, TEMPORARILY
II/10 CIB Cons. I/10 IV/09 2.0 6.0

CIB forecast
in % qoq 0.7 0.6 0.3 0.4 1.5 4.8
1.0 3.6
2Q GDP should mark a decent acceleration, rising 0.7% qoq. 0.5 2.4
The likely acceleration in industrial production and high 0.0 1.2
level of services sector figures, together with a likely -0.5 0.0
rebound in retail sales (see above), underpin our forecast. -1.0 -1.2
However, we expect 2Q to be a peak of the current cycle -1.5 -2.4
and growth is expected to slow in 2H, though we don’t -2.0 -3.6
GDP (in % qoq)
see a double-dip recession. -2.5 -4.8
GDP (in % yoy, RS)
-3.0 -6.0
I/00 I/01 I/02 I/03 I/04 I/05 I/06 I/07 I/08 I/09 I/10
Tullia Bucco (UniCredit Bank Milan) Chiara Corsa, (UniCredit Bank Milan)
+39 02 8862-2079 +39 02 8862-2209
tullia.bucco@unicreditgroup.de chiara.corsa@unicreditgroup.de
Alexander Koch, CFA (UniCredit Bank) Chiara Silvestre (UniCredit Bank Milan)
+49 89 378-13013 chiara.silvestre@unicreditgroup.de
alexander.koch1@unicreditgroup.de
Marco Valli (UniCredit Bank Milan)

+39 02 8862-8688,
marco.valli@unicreditgroup.de

Friday Notes
Data Monitor US - Preview of the coming week
Tuesday, 20 July
HOUSING STARTS & BUILDING PERMITS ANOTHER DECLINE IN HOUSING STARTS

Housing starts, in k (annualized) 565 577 593 659 2200
Building permits, in k (annualized) 580 570 574 610 2000
1800
Housing starts fell by 10% in May after the expiration of 1600
the tax credit for homebuyers, which boosted construction 1400
and sales in preceding months. For June, we expect another, 1200
albeit somewhat more moderate drop in starts. This is, 1000
among others, indicated by the back-to-back decline in Housing starts (in thousands, saar)
800
Building permits (in thousands, saar)
building permits in April and May. Permits declined in 600
May to the lowest level since October. They are 400
expected to remain at these benign levels as the still 01/00 01/02 01/04 01/06 01/08 01/10
huge oversupply of unsold homes continues to weigh on

construction activity for the time being.
Thursday, 22 July
INITIAL JOBLESS CLAIMS BOUNCE AFTER GM-RELATED IMPROVEMENT
17 July CIB Cons. 20 Jul 3 Jul In thousands

in thousands 445 460 429 458 700
Jobless claims (thousands, weekly)
650
Initial jobless claims dropped significantly in the week 4-week moving average
600
ending July 10. Behind this decline to the lowest level
550
since August 2008 was the fact that General Motors did
500
not shut down its plants for the annual retooling that
usually occurs in the week of the Independence Day 450
holiday (i.e. in the week ending July 10). That kept both 400
GM employees and related suppliers employed, 350

whereas they had been eligible to file jobless claims in 300
previous years. As this, however, was a one-off effect, 250
claims likely bounced back in the week ending July 17 to 01/00 01/02 01/04 01/06 01/08 01/10
their disappointing range of 440-490k, where they had
been since November 2009. Source: Thomson Datastream, UniCredit Research

Friday Notes
INDEX OF LEADING INDICATORS FIRST DECLINE IN 15 MONTHS
June CIB Cons. May Apr In % yoy

in % mom -0.2 -0.3 0.4 0.0 20 50.0
OECD Conference Board (RS) ECRI (RS)
15 37.5
The Conference Board’s Index of Leading Indicators
10 25.0
(LEI) has considerably lost momentum in the last few
months. The index was flat in April after rising in the previous 5 12.5
twelve months, and the annualized 3M change slowed to 0 0.0

7¼% in May. That is only half as much as in mid-2009
-5 -12.5
and the lowest number since April 2009. In June, the LEI
-10 -25.0
probably even declined again. That would be the
first monthly drop in 15 months. The largest negative -15 -37.5
contributions likely came from a decline in the average -20 -50.0

workweek, faster vendor deliveries and the drop in the 01/99 01/01 01/03 01/05 01/07 01/09
S&P 500. The yield spread and a higher real money

supply, in contrast, boosted the LEI in June.
EXISTING HOME SALES PLUNGE AFTER THE EXPIRATION OF THE TAX CREDIT

In mn annualized 4.50 5.20 5.66 5.79 Total home sales (in % yoy)
40
6-month moving average
30
A bit surprisingly, existing home sales eased 2.2% in May.
As they only occur with the closing of a sales contract 20
(not with the signing), it was expected that existing home 10
sales in May still benefited from the homebuyer tax credit
0
that ended in April. For June, we expect a significant
-10
decline to a 4½ million units annual rate. Such a plunge
has been indicated by significant declines in the most -20
important leading indicators, such as the Pending Home -30
Sales Index or mortgage applications. 01/00 01/02 01/04 01/06 01/08 01/10

+1 212 672 5957
harm.bandholz@us.unicreditgroup.eu

Friday Notes
US Review As a result, the annualized 3M change fell to -1½%. Apart

from the severe declines during the Great Recession, that is
the second fastest drop over such a period since statistics
Wary Fed debates further stimulus began in 1992 (cf. chart).
The minutes of the June 22/23 FOMC meeting confirmed
that the majority of Fed officials became more worried about LOSING MOMENTUM
the strength of the US recovery. While all participants continued
to forecast a moderate recovery in economic activity, “most Retail sales ex cars, gasoline and building materials,
participants revised down slightly their outlook for economic annualized 3M change in %
growth, and about one-half of the participants judged the 15
balance of risks to growth as having moved to the downside”

(cf. table). This is partly due to the fact that financial markets 10
have become “less supportive of economic growth, largely

reflecting international spillovers from European fiscal 5
strains.” In addition, the minutes emphasized that businesses

were still cautious about hiring or investing, given uncertainties 0
about the outlook for the economy, developments in global

financial markets and legislative changes. So far, the -5
changes to the outlook “were viewed as relatively modest

and as not warranting policy accommodation beyond that already -10
Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
in place. However, members noted that […] the Committee
would need to consider whether further policy stimulus might
become appropriate if the outlook were to worsen appreciably.” Source: Census Bureau, Thomson Datastream, UniCredit Research
In other words, the Fed spent quite some time in its June
meeting debating a potential expansion of its credit easing policy. Wider trade deficit poses downside
risk to 2Q GDP growth
ECONOMIC PROJECTIONS OF THE FEDERAL RESERVE
The US trade deficit unexpectedly widened in May to USD 42.3bn
Central tendency 2010 2011 2012
from USD 40.3bn. That is the biggest gap in 18 months
Real GDP growth 3.0% - 3.5% 3.5% - 4.2% 3.5% - 4.5%
April projection 3.2% - 3.7% 3.4% - 4.5% 3.5% - 4.5% (November 2008). While exports were up USD 3.5bn (+2.4%),
Unemployment rate 9.2% - 9.5% 8.3% - 8.7% 7.1% - 7.5% imports increased even faster. They rose USD 5.5bn (+2.9%),
April projection 9.1% - 9.5% 8.1% - 8.5% 6.6% - 7.5%
as a 9.5% decline in crude oil imports was more than offset
PCE inflation 1.0% - 1.1% 1.1% - 1.6% 1.0% - 1.7%
April projection 1.2% - 1.5% 1.1% - 1.9% 1.2% - 2.0% by strong increases in imports of consumer goods (+10.4%)
Core PCE inflation 0.8% - 1.0% 0.9% - 1.3% 1.0% - 1.5% and autos (+12.8%). The real deficit of goods widened to
April projection 0.9% - 1.2% 1.0% - 1.5% 1.2% - 1.6% USD 46.0bn, which is the largest since January 2009.
Source: Federal Reserve, UniCredit Research In April and May combined, the real goods deficit was USD 2.8bn
wider than the 1Q average. If this increase is confirmed by
the upcoming June report, net exports would subtract again
Retail sales fell for the second straight almost one percentage point from GDP growth in the second
month in June quarter (after -0.8pp in 1Q). That drag is about half a percent
US retail sales fell another 0.5% in June, after dropping 1.1% point larger than we had assumed so far. Hence, there are now
in May. It was the first back-to-back decline since the first downside risks to our 3% GDP forecast for the second quarter.
quarter of 2009. As expected, most of the decrease in June
was caused by a weaker car sales and a drop in (nominal) +1 212 672 5957
gasoline sales, which in turn was caused by lower gas harm.bandholz@us.unicreditgroup.eu
prices. Sales of building materials declined another 1.0%
after dropping 9.0% in May. This correction is probably still
due to the end of the “cash for appliances” program. In addition,
sales in the less volatile core group, which excludes cars,
gasoline and building material, have visibly lost momentum
in the second quarter. After declining by 0.4% and 0.2% in
April and May, they edged up by a mere 0.2% in June.

Friday Notes
Fixed Income Outlook Equities, specifically in the financial sector, skyrocketed in

the days immediately preceding the publication of the stress
tests. During the 4 weeks before and the 4 after the publication,
■ There was hardly any activity on government bond markets
the S&P 500 sub-index "Investment Banks & Brokerage"
this week reflecting a wait-and-see attitude ahead of the
added 18.6%, while the sub-index "Diversified Banks" even
publication of the stress tests of European banks next Friday.
gained 19.4%. Government bond market reactions can
also be interpreted as having expressed faith: 10Y US yields
■ Core bond market reactions should come under moderate
rose 90bp, while 10Y euro zone yields added 47bp.
pressure after the release of the stress test and we would
neutralize the active duration exposure.
BOND MARKETS AND TRADE-WEIGHTED USD
Hardly any activity this week

10Y UST (LS) 10Y Bunds (LS) USD-Index (RS)
6 90
The last few days saw no activity in core bond markets. 10Y release US stress test
85
Bunds were basically unchanged at least compared to the
previous week (+1 bp). There are several explanations for 5 80
this. On the one hand, there were no relevant data releases; 75
on the other, the ECB has probably thinned out the periphery 4 70
markets to such an extent that there is hardly any serious 65

selling interest. This is suggested by the extremely low volume 3 60
of the ECB purchases in the preceding weeks (only EUR 1bn). 55
But there was also hardly any market reaction to Moody’s 2 50
downgrade of Portugal’s country rating by 2 notches from
1/1/08
3/1/08
5/1/08
7/1/08
9/1/08
11/1/08
1/1/09
3/1/09
5/1/09
7/1/09
9/1/09
11/1/09
1/1/10
3/1/10
5/1/10
7/1/10
Aa2 to A1. A further argument may be a wait-and-see attitude
ahead of the publication of the stress tests for European banks.
Stress test then in the US ...
If there is one highlight of the coming week, then it is the ... and now in Europe
publication of the results of the stress tests of European How many of the 91 tested banks will be declared stress
banks on 23 July (next Friday). There has been much speculation resistant? It is expected that the percentage will be higher
on the positive and negative aspects, stress criteria and than for the banks tested in the US (47% of the banks tested
ramifications. To assess the possible reactions, we briefly reflect had no capitalization requirement). This must not necessarily
on the release of the stress test of US banks, the results of be a reason for jubilation if conspiracy theories do the
which were published at the beginning of May 2009. At that rounds. But let’s assume that despite diverse prophecies of
time, 19 banks were tested, of which 9 banks were deemed doom and gloom (even the WSJ and the FT speculated on
to require no additional capital and 10 banks were deems to irregularities with the US stress test) there is a huge
need capitalization totaling USD 74.6bn, which was to be opportunity here. Under this premise, the relevant question
covered within roughly four weeks. Interesting at the time for us in this section about the reaction on the bond markets
was the reaction of the individual asset classes: The USD-Index should also be clear. The hardest of all “core“ markets, i.e.
was under pressure even before the publication of the stress Germany, Finland and the Netherlands, should tend to come
tests. The index fell 3.9% during the 20 trading sessions under moderate pressure. Bund yields should, therefore, add
ahead of the publication date. And there was no change to a few basis points. The bond markets in the Southern periphery
this situation in the four weeks after: a minus of a further countries on the other hand should survive any perceived
2.3%. Overall, therefore, a setback of more than 6%! EUR-USD recapitalization requirement. To the extent that there is any
rose 6.7% during this timeframe. One cannot, therefore, say pressure in these markets as a result of the stress test, the
that the USD profited from the US stress tests. Or was it the ECB will probably expand its purchase volumes again
case that the confidence-building measure for the US banks strongly and rapidly stabilize the markets, especially after
was, at the same time, a confidence-boosting measure at the Trichet’s comment at the most recent press conference “Do
global level. As a result, the combination “rising appetite for not underestimate the euro zone“.
risk = weaker USD = strength of other currencies“ would apply.
Under this premise and presuming a half-way satisfactory
stress test of European banks, the EUR should be able to
firm, and the USD will slide across the board.

Friday Notes
Strategy
In the outlook for 3Q10 last week, we recommended a
moderately long duration. This is still our preference looking
to the end of September. For the coming one or two weeks,
we would, however, temporarily "immunize" the active duration.
Michael Rottmann (UniCredit Bank)

+49 89 378 15121
michael.rottmann1@unicreditgroup.de

Friday Notes
Forex Outlook EUR-USD: bullish but addicted to risk

The EUR again put in a strong weekly performance as risk
■ View: The USD might still remain under siege due to Fed appetite remained healthy, mainly due to the positive kick-off
speeches and economic data during the next week. of the US earnings season, relatively well received Spanish
and Portuguese bond and T-bill auctions and the apparently
■ EUR: The EUR is still on a bullish trend, but is in desperate reduced liquidity needs of the EU banking sector. As noted in
need of rising equities, while risk of friendly fire from the our chart, the positive correlation of EUR-USD and the Dow
EU bank stress test is non-negligible. Jones since May is relatively evident and the fact that equities
at least managed to defend last week’s levels, notwithstanding
■ GBP: If risk appetite holds up well, next week’s UK data a further weakening in economic data on both sides of the
releases should again prove rather sterling-positive. Atlantic, helped the EUR again during the week. Hence,
negative news like Moody’s downgrade of the Portuguese
USD to still remain under siege credit rating by two notches was shrugged off relatively easily
for the moment.
The corporate earnings season kicked off very well in the US
and the consequent easing of equity volatility contributed as
well to generate stronger risk momentum in FX. Accordingly, DOW JONES & EUR-USD SPOT
the classical defensive currencies, the CHF and the JPY, lost
12000 1.6
some ground, before, however, recovering towards the end Dow Jones
of the week when markets became more worried about the 11000 EUR-USD (RS) 1.5
extent of the USD weakness. Indeed, in the end, it was again
mainly the USD which weakened against other FX majors, 10000 1.4
following downbeat US data and the dovish FOMC minutes
9000 1.3
published this week. In Europe, the reduced liquidity needs
of the EMU banking sector, as emerged from this week’s 8000 1.2
ECB tender operations, has added to the positive picture and
the market currently is characterized as well by a rather 7000 1.1
benevolent assessment of the EU bank stress test.

6000 1.0
01/09 04/09 07/09 10/09 01/10 04/10 07/10
The positive market sentiment surrounding the stress test is
bound to prevail at least until the disclosure of the first results
on a country-by-country basis on July 23. However, as market
chatter already conjectures about which banks have performed
in the stress test in a certain manner, notwithstanding the However, we would not bank too much on a further happy
fact that speculation on the details and on the methodologies cohabitation between poor macroeconomic data releases
applied are still ongoing, there seems to be some inconsistency and positive equity markets. Indeed, the momentum of equity
in the current benevolent assessment of the stress test, has already weakened this week and the correlation between
which could be a potential factor of market uncertainty, once the the Dow Jones and EUR-USD might be weakening now, as the
bank-by-bank results will be published at the beginning of August. latest EUR-USD rally seemed to be fuelled more by generalized
USD weakness than by rallying equity markets. Data
Next week, however, the risk picture should still continue to releases during the next week should deliver more of the
remain shaped mainly by the full unfolding of the US corporate same in the eurozone – the PMIs and the German Ifo are
earnings season, US data releases mainly referring to the expected to soften and as such will do little to help EUR-USD
housing market and the Fed’s Bernanke semi-annual testimony to recover further. Having said that, from a chart-technical
in Congress. A further weakening in the US housing market perspective, EUR-USD still remains on a bullish trend and
combined with a very cautious outlook on the US economy relatively well positioned to target the 1.2960 and 1.31 levels
by Bernanke should again keep the CHF and the JPY on bid if the US earnings season continues to provide mainly positive
and the USD on offer. surprises and equity markets continue to digest disappointing
US economic data rather well. Another key precondition for a
possible EUR-USD return to levels of 1.30 and above is
however still that the EU bank stress test does not turn out to
be a boomerang regarding the fulfillment of its initial goal of
providing further guidance on the real state of health of the
EU banking sector.

Friday Notes
GBP: firm UK data to help again

Sterling again strengthened amid strong inflation and core
inflation readings, as well as a declining jobless numbers and
good risk appetite. Regarding BoE speakers Miles and Sentance,
the market preferred Sentence’s hawkish position on rates,
contributing to a GBP-USD rise to 1.54 from 1.5050 at the
end of last week, while EUR-GBP range-traded in the 0.83-0.84
band as the positive sterling momentum was matched by the
single currency’s own strength.
Next week, sterling will still be mainly under the influence of

UK data and BoE events. The BoE minutes will show how
the monetary policy stance of the MPC’s members could
have changed following the strong budget cuts inherent to
the June 22 emergency budget. As such, the minutes could
slow down the cable rally if BoE members should have seen see
strong repercussions of the budget cuts on the monetary policy
stance. On the other hand, the retail sales release and the
first estimate of 2Q GDP should prove rather sterling-positive.
This week’s strong cable rally might represent as well some
danger for a temporary pullback, but we still favor cable
higher in the medium term. The 15D moving average has
now breached the 60D and the 100D moving averages and a
break above the key resistance level at 1.5525 would send
out another bullish signal and bring the 200D line at 1.56 on
the radar screen.
Dr. Stephan Maier (UniCredit Bank Milan)

+39 02 8862 8604
stephan.maier@unicreditgroup.eu

Friday Notes
CIB View – Our Global Picture ■ Taking into account the recent escalation of the sovereign
debt crisis together with the weak foundation of the current
Global economy recovery, the ECB should leave its key interest rate
unchanged at currently 1% well into next year. We expect
■ The Great Recession has run its course last autumn. Real
the first hike in 4Q11 (25 bp). But the central bank will continue
worldwide GDP growth even accelerated in 4Q09. And
the now halted removal of excess liquidity again at a measured
most economic indicators still point north. It is, however,
pace once financial woes in Europe have abated.
so far no more than a technical rebound after the preceding
economic collapse that is already facing the threat of another
setback during 2H10 before economic growth should Government bond markets
re-accelerate in the course of next year. ■ The expected US monetary tightening in early 2011 in
conjunction with growing risk appetite will send government
■ For 2010, we expect real GDP to rise 4.4% on a PPP basis US bond yields higher (again) later this year, albeit moderately.
(2011: +4.2%; 2009: -1%). That remains, however, below Combined with the growing supply of Treasuries, long-term
trend. Economic activity in industrialized countries should US yields (10Y) should reach 3.80% level at the end of
post only a modest of 2.4% (2011: +2.1%) after having this year and 4.30% by end-June 2011. 10Y Bund yields
contracted by 3.1% in 2009. China and Emerging Asia, should barely rise over the next couple of months, reaching
which were the first to achieve a trend reversal last year, 3¼% at the end of this year and 3.50% six months later.
will clearly remain at the top of the growth league also in 2010.
Exchange rates
US ■ The debt crisis should continue to weigh on the euro. We
■ After exiting the Great Recession last autumn, real GDP expect EUR-USD to weaken further, testing the 1.20 mark
growth has accelerated to a strong 5.6% in 4Q09 and a solid in 1Q11. Headwind is also coming from the widening of
3.2% in 1Q10, respectively. The outlook for 2Q is promising, the transatlantic interest rate & yield spread since the Fed
too. But this pace of the recovery is not sustainable. will start its tightening cycle way before the ECB. We expect
Growth was primarily fuelled by the re-stocking process as the JPY to weaken over next year or so. USD-JPY should
well as the advance effects due to federal fiscal programs rise to the 100 mark at the end of March next year.
such as the “cash for clunkers“ program. It was therefore
borrowed growth from the future. Hence, we expect growth
OUR MACRO FORECASTS
to decelerate toward 2% in 2H10/1H11 before gaining
momentum again later next year. For 2010 as a whole, we in % yoy 2009 2010 2011
expect real GDP to grow by 3% (2011: 2.4%; 2009: -2.4%). GDP EMU -4.1 1.0 1.3
CPI EMU 0.3 1.5 1.8
■ The outlook for US growth moderation should not trigger a GDP Germany -4.9 1.8 1.5
quick rise in the Fed Funds Rate despite the fact that the CPI Germany 0.3 1.1 1.6
FOMC raised its discount rate recently. We expect the
GDP Italy -5.1 0.9 1.0
Fed to stick to its Zero Interest Rate Policy (target rate
CPI Italy 0.8 1.6 1.9
currently at 0%-0.25%) this year followed by a first rate
hike in 1H11. This will be preceded by a further gradual GDP US -2.4 3.0 2.4
removal of its Quantitative Easing measures. CPI US -0.3 1.8 2.2
Eurozone OUR FI/FX & OIL PRICE FORECASTS
■ The eurozone exited its deepest recession since WWII 2010/11 30-Sept 31-Dec 31-Mar 30-Jun
also in autumn last year. But it was primarily the turnaround EMU 3M (%) 0.95 1.20 1.28 1.35
in the inventory cycle, the growth effects of economic stimuli EMU 10Y (%) 3.00 3.25 3.45 3.50
programs and improving net exports that lent a helping US 3M (%) 0.60 0.75 1.05 1.55
hand. After a bounce-back in the current quarter, the US 10Y (%) 3.40 3.80 4.20 4.30
exceptionally slow pace of the recovery should continue –
EUR-USD 1.24 1.22 1.20 1.18
but we do not expect the EMU-wide economy to fall back
USD-JPY 91 95 100 106
into recession again. Eurozone GDP should grow by only
1% this year after having contracted by 4.1% last year. Oil Price 78 85 80 80
For 2011, we expect EMU-wide GDP growth of 1¼%.

Friday Notes
Macro Forecasts
GDP, real (%, yoy) 2004 2005 2006 2007 2008 2009 2010f 2011f
World economy * 4.7 4.3 4.9 5.0 2.9 -0.6 4.4 4.2
Industrialized countries * 2.9 2.5 2.8 2.5 0.5 -3.1 2.4 2.1
US 3.6 3.1 2.7 2.1 0.4 -2.4 3.0 2.4
Euro area 1.9 1.8 3.1 2.8 0.4 -4.1 1.0 1.3
Germany ** 0.7 0.9 3.4 2.6 1.0 -4.9 1.8 1.5
France 2.3 2.0 2.4 2.3 0.1 -2.5 1.4 1.3
Italy 1.4 0.8 2.1 1.4 -1.3 -5.1 0.9 1.0
Spain 3.3 3.6 4.0 3.6 0.9 -3.6 -0.4 0.6
Austria 2.5 2.5 3.5 3.5 2.0 -3.5 1.3 1.4
UK 3.0 2.2 2.9 2.6 0.5 -4.9 1.0 2.0
Switzerland 2.5 2.6 3.6 3.6 1.8 -1.4 2.0 1.5
Sweden 3.5 3.3 4.6 3.4 -0.6 -5.1 2.7 2.1
Japan 2.7 1.9 2.0 2.4 -0.7 -5.3 2.7 1.8
Developing countries * 7.4 7.0 7.9 8.3 6.0 2.4 6.6 6.4
Asia 8.6 9.0 9.8 10.6 7.7 6.9 9.2 8.3
China 10.1 10.4 11.6 13.0 9.6 9.1 10.5 9.0
India 7.9 9.1 9.7 9.3 6.4 5.7 9.4 8.4
Latin America 6.0 4.7 5.7 5.7 4.2 -1.8 4.8 4.0
Brazil 5.7 3.2 3.8 5.7 5.1 -0.2 7.1 4.2
Central and Eastern Europe 7.5 6.1 7.2 6.9 4.0 -5.9 2.8 4.1
Russia 7.2 6.4 7.7 8.1 5.6 -7.9 3.4 5.0
Consumer prices, CPI (%, yoy) 2004 2005 2006 2007 2008 2009 2010f 2011f
US 2.7 3.4 3.2 2.9 3.8 -0.3 1.8 2.2
core rate (ex food & energy) 1.8 2.1 2.5 2.3 2.3 1.7 0.8 1.2
Euro area, HICP 2.1 2.2 2.2 2.1 3.3 0.3 1.5 1.7
Germany 1.7 1.6 1.6 2.3 2.6 0.3 1.1 1.4
France 2.1 1.7 1.7 1.5 2.8 0.1 1.5 1.5
Italy 2.2 2.0 2.1 1.8 3.3 0.8 1.6 1.9
Spain 3.0 3.4 3.6 2.8 2.8 4.1 1.5 1.6
Austria 2.1 2.3 1.5 2.2 3.2 0.5 1.8 2.0
UK 1.3 2.0 2.3 2.3 3.6 2.1 3.2 2.3
Switzerland 0.8 1.2 1.1 0.7 2.4 -0.5 1.1 1.1
Sweden 0.4 0.5 1.4 2.2 3.5 -0.3 1.5 1.5
Japan 0.0 -0.3 0.2 0.0 1.4 -1.3 -1.0 -0.3
GDP, real (%, qoq) I/09 II/09 III/09 IV/09 I/10f II/10f III/10f IV/10f
US (annualized) -6.4 -0.7 2.2 5.6 2.7 3.0 2.4 2.4
Euro area -2.5 -0.1 0.4 0.1 0.2 0.5 0.3 0.2
Germany -3.5 0.4 0.7 0.2 0.2 0.9 0.5 0.4
France -1.4 0.2 0.3 0.5 0.1 0.5 0.3 0.2
Italy -2.9 -0.3 0.4 -0.1 0.4 0.2 0.2 0.2
Spain -1.7 -1.0 -0.3 -0.1 0.1 0.0 0.0 0.1
Austria -2.1 -0.5 0.7 0.3 -0.1 0.7 0.5 0.5
UK -2.6 -0.7 -0.3 0.4 0.3 0.5 0.4 0.4
Switzerland -1.1 -0.1 0.5 0.9 0.4 0.6 0.4 0.3
Sweden -3.0 0.7 -0.3 0.4 1.4 0.3 0.4 0.5
Japan -2.8 0.7 0.3 0.4 0.2 0.2 0.3 0.4
Consumer prices, CPI (%, yoy) I/09 II/09 III/09 IV/09 I/10f II/10f III/10f IV/10f
US -0.2 -1.0 -1.6 1.5 2.4 2.0 1.5 1.4
Euro area, HICP 1.0 0.2 -0.4 0.4 1.1 1.5 1.6 1.8
Germany 0.8 0.2 -0.2 0.4 0.8 1.1 1.1 1.4
France 0.6 -0.2 -0.4 0.4 1.3 1.6 1.5 1.5
Italy 1.5 0.9 0.1 0.7 1.3 1.4 1.6 1.9
Spain 0.5 -0.7 -1.0 0.2 1.2 1.5 1.4 1.8
Austria 1.1 0.3 0.0 0.6 1.4 2.0 1.9 1.9
UK 3.0 2.1 1.5 2.1 3.3 3.5 3.1 2.9
Switzerland 0.0 -0.7 -1.0 -0.2 1.1 1.2 1.0 1.1
Sweden 0.8 -0.5 -1.2 -0.4 1.0 1.3 1.6 1.9
Japan -0.1 -1.0 -2.2 -1.8 -1.1 -1.3 -1.0 -0.8
Comments: *The GDP shares used for aggregation are based on the purchasing-power-parity (PPP) valuation of country GDPs
** Real GDP 2010 unadjusted: +2% GDP = Gross Domestic Product, HICP = Harmonized Index of Consumer Prices, CPI = Consumer Price Index, f = forecast

Friday Notes
Interest & Exchange Rate Forecasts (I)

INTEREST RATE FORECASTS (%, END QUARTER)
2010/11 current end-Q3 end-Q4 end-Q1 end-Q2

Eurozone bond market
Refi rate 1.00 1.00 1.00 1.00 1.00
3M Euribor 0.85 0.95 1.20 1.28 1.35
2Y 0.80 0.85 1.05 1.15 1.30
5Y 1.64 1.83 2.10 2.30 2.40
10Y 2.66 3.00 3.25 3.45 3.50
30Y 3.32 3.60 3.80 3.95 4.00
10Y swap spread (in bp) 24 25 25 25 20
US Treasury Market
Fed funds target rate 0.13 0.25 0.25 0.75 1.25
3M USD Libor 0.52 0.60 0.75 1.05 1.55
2Y 0.59 0.85 1.30 2.00 2.40
5Y 1.74 2.11 2.55 3.15 3.45
10Y 2.97 3.40 3.80 4.20 4.30
30Y 3.97 4.25 4.60 4.70 4.75
10Y swap spread (in bp) 1 10 15 20 20
Japan
Target rate 0.10 0.10 0.10 0.10 0.10
3M JPY Libor 0.24 0.30 0.35 0.40 0.40
10Y JGB 1.10 1.40 1.50 1.60 1.65
United Kingdom
Repo rate 0.50 0.50 1.00 1.50 2.00
3M GBP Libor 0.73 0.80 1.10 1.80 2.30
10Y Gilt 3.36 3.80 4.30 4.50 4.70
Switzerland
3M CHF Libor mid target rate 0.25 0.25 0.25 0.50 0.75
3M CHF Libor 0.12 0.10 0.30 0.60 0.85
10Y Swissie 1.43 2.00 2.25 2.45 2.35
EXCHANGE RATE FORECASTS (END QUARTER)

EUR-USD 1.2930 1.24 1.22 1.20 1.18
EUR-JPY 112.63 113 116 120 125

EUR-GBP 0.8383 0.82 0.78 0.75 0.72
EUR-CHF 1.3477 1.29 1.27 1.30 1.33
USD-JPY 87.11 91 95 100 106

GBP-USD 1.5424 1.52 1.57 1.60 1.63
USD-CHF 1.0423 1.04 1.04 1.08 1.13
COMMODITY PRICE FORECASTS

Oil price (Brent, USD/b) 75.95 78 85 80 80
DJ commodity price index 258.86 290 310 310 310

Friday Notes
Interest & Exchange Rate Forecasts (II)

INTEREST RATE FORECASTS (%, END QUARTER)

Sweden
Key rate 0.50 0.50 0.75 1.00 1.50
3M rate 0.86 0.95 1.10 1.55 2.00
10Y government bond yield 2.71 3.20 3.65 3.90 4.15
10Y spread to Bunds (in bp) 5 20 40 45 65
Norway
Key rate 2.00 2.25 2.50 2.75 3.00
3M rate 2.64 2.80 3.00 3.20 3.40
Canada
Key rate 0.50 0.75 0.75 1.00 1.25
3M rate 0.88 1.00 1.10 1.30 1.50
Australia
Key rate 3.50 4.75 5.00 5.25 5.25
3M rate 4.94 5.05 5.30 5.50 5.50
New Zealand
Key rate 2.75 3.00 3.25 3.50 3.50
3M rate 3.31 3.40 3.70 3.85 4.00
EXCHANGE RATE FORECASTS (END QUARTER)

EUR-SEK 9.4529 9.50 9.45 9.40 9.35
EUR-NOK 8.0300 7.70 7.65 7.60 7.55
EUR-CAD 1.3486 1.20 1.22 1.28 1.30
EUR-AUD 1.4760 1.33 1.30 1.29 1.30
EUR-NZD 1.8064 1.68 1.63 1.60 1.62
USD-SEK 7.3123 7.66 7.75 7.83 7.92

USD-NOK 6.2097 6.21 6.27 6.33 6.40
USD-CAD 1.0430 0.97 1.00 1.07 1.10
AUD-USD 0.8760 0.93 0.94 0.93 0.91
NZD-USD 0.7158 0.74 0.75 0.75 0.73
EUR-USD 1.2930 1.24 1.22 1.20 1.18

Friday Notes
Economic Event & Data Release Calendar

Time Consensus
Date (ECB) Country Indicator Period CIB est. (Bloomberg) Prev. period
16 July to 23 July 2010
Fri, 16 Jul '10 14:30 US CPI ex food & energy (core, in % yoy) Jun 0.9 0.9
14:30 US Consumer price index (in % yoy) Jun 1.2 2.0
14:30 US CPI ex food & energy (core, in % mom) Jun 0.1 0.1
14:30 US Consumer price index (in % mom) Jun -0.1 -0.2
15:00 US Net long-term capital inflows (TIC, USD bn) May 40 83.013
15:55 US University of Michigan consumer confidence Jul 74 76
Mon, 19 Jul '10 10:00 EMU Current account balance (EUR bn) May -5.1
16:00 US NAHB housing market index Jul 16 17
Tue, 20 Jul '10 8:00 GE Producer price index, PPI (in % yoy) Jun 1.2 0.9
10:00 IT Industrial orders (in % mom) May 4.7
14:30 US Housing starts (in thousands) Jun 565 577 593
14:30 US Building permits (in thousands) Jun 580 570 574
16:00 US Fed's Tarullo Testifies on Financial Regulation in Senate
Wed, 21 Jul '10 10:30 UK Bank of England Releases Monetary Policy Committee Minutes
13:00 US MBA mortgage applications Jul 16 -2.9
16:00 US Bernanke Gives Monetary Policy Report to Senate Banking Panel
Thu, 22 Jul '10 GE Import price index (in % yoy) Jun 8.5
8:45 FR Consumer confidence (index) Jul -40 -39
8:45 FR Business confidence expectations Jul -7 -7
8:45 FR Business confidence production outlook Jul -7 -4
8:45 FR Business confidence overall (INSEE) Jul 95 95 95
9:30 GE Services PMI (index) Jul 54.6 54.8
9:30 GE Manufacturing PMI (index) Jul 58.0 58.4
9:50 FR Services PMI (index) Jul 60.0 60.8
9:50 FR Manufacturing PMI (index) Jul 54.1 54.8
10:00 EMU Composite PMI (index) Jul 55.2 56.0
10:00 EMU Services PMI (index) Jul 55.0 55.0 55.5
10:00 EMU Manufacturing PMI (index) Jul 54.9 55.2 55.6
10:30 UK Retail sales (in % mom) Jun 0.6 0.6 0.5
11:00 EMU New orders (in % mom) May -0.2 0.6
14:30 US Initial jobless claims (in thousands) Jul 16 445 460 429
15:30 US Bernanke Gives Monetary Policy Report to House Panel
16:00 EMU European Commission consumer confidence climate (index) Jul -17 -17
16:00 US Existing home sales (in mn) Jun 4.5 5.2 5.66
16:00 US OFHEO house price index (in % mom) May -0.3 0.8
16:00 US Leading indicators (Conference Board, in % mom) Jun -0.2 -0.3 0.4
Fri, 23 Jul '10 8:45 FR Household consumption (manufactured goods, in % mom) Jun 0.8 0.4 0.7
9:30 IT Consumer confidence (ISAE, index) Jul 104.4
10:00 IT Retail sales (in % mom) May -0.3
10:00 GE ifo business climate (index) Jul 101.5 101.5 101.8
10:30 UK Real GDP (in % yoy) Q2 1.1 -0.2
10:30 UK Real GDP (in % qoq) Q2 0.7 0.6 0.3
*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted

Friday Notes
Economic Event & Data Release Calendar – The week after

Time Consensus
Date (ECB) Country Indicator Period CIB est. (Bloomberg) Prev. period
26 July to 30 July 2010
Mon, 26 Jul '10 UK House price (Nationwide, in % yoy) Jul 8.7

16:00 US New home sales (in thousands) Jun 300
Tue, 27 Jul '10 0:00 GE Retail sales (real, in % mom) Jun 0.4
8:00 GE GfK consumer confidence Aug 3.5
10:00 EMU M3 money supply (in % yoy, 3M moving average) Jun -0.2
10:00 EMU M3 money supply (in % yoy) Jun -0.2
15:00 US S&P/Case-Shiller home priceindex (in % yoy) May 3.8
16:00 US Conference Board consumer confidence Jul 52.9
Wed, 28 Jul '10 GE Harmonized CPI (in % yoy) Jul 0.8

GE Consumer price index, CPI (national, in % yoy) Jul 0.9
7:00 JP Tankan survey small business Jul 47.4
14:30 US Durable goods orders ex transportation (in % mom) Jun 1.6
14:30 US Durable goods orders (in % mom) Jun 0.5 -0.6
20:00 US Fed Releases Beige Book Economic Report
Thu, 29 Jul '10 8:45 FR Producer price index, PPI (in % mom) Jun 0.0
9:30 IT Business confidence overall (ISAE, index) Jul 96.1
9:55 GE Unemployment rate (in %) Jul 7.7
9:55 GE Unemployment change (in thousands) Jul -21
10:30 UK Mortgage approvals (in thousands) Jun 49.815
11:00 EMU European Commission services sentiment (index) Jul 4
11:00 EMU European Commission manufacturing sentiment (index) Jul -6
11:00 EMU European Commission economic sentiment (index) Jul 98.7
11:00 EMU European Commission business climate (index) Jul 0.37
Fri, 30 Jul '10 1:01 UK Consumer confidence (GFK, index) Jul -19
1:15 JP PMI (Nomura) Jul 53.9
1:30 JP Unemployment rate (in %) Jun 5.2
1:30 JP Core consumer price index (in % yoy) Jun -1.6
1:30 JP Consumer price index (ex fresh food, in % yoy) Jun -1.2
1:30 JP Consumer price index (in % yoy) Jun -0.9
1:50 JP Industrial production (in % yoy) Jun 20.4
10:00 IT Producer price index, PPI (in % yoy) Jun 3.8
11:00 IT Consumer price index (in % yoy) Jul 1.3
11:00 EMU Consumer price index, CPI (in % yoy, flash estimate) Jul 1.4
11:00 EMU Umemployment rate (in %) Jun 10.0
11:30 SZ KOF business climate Jul 2.25
14:30 US Employment cost index (in % qoq) Q2 0.6
14:30 US PCE deflator (in % qoq annualized) Q2 0.7
14:30 US Real GDP (in % qoq annualized) Q2 3.1 2.7
15:45 US Chicago Purchasing Managers Index Jul 59.1
*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted

Friday Notes
Disclaimer
Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and accu-
racy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. We reserve the right
to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice.
This analysis is for information purposes only and (i) does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any
financial, money market or investment instrument or any security, (ii) is neither intended as such an offer for sale or subscription of or solicitation of an offer to buy or subscribe
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suitable for certain investors depending on their specific investment objectives and time horizon or in the context of their overall financial situation. The investments discussed
may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value of investments. Further-
more, past performance is not necessarily indicative of future results. In particular, the risks associated with an investment in the financial, money market or investment instru-
ment or security under discussion are not explained in their entirety.
This information is given without any warranty on an "as is" basis and should not be regarded as a substitute for obtaining individual advice. Investors must make their own de-
termination of the appropriateness of an investment in any instruments referred to herein based on the merits and risks involved, their own investment strategy and their legal,
fiscal and financial position. As this document does not qualify as an investment recommendation or as a direct investment recommendation, neither this document nor any part
of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Investors are urged to contact their
bank's investment advisor for individual explanations and advice.
Neither UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit Bank AG Vienna Branch, UniCredit Bank AG Milan Branch, UniCredit Securities, UniCredit Menkul
Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank nor any of their respective directors, officers or
employees nor any other person accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or oth-
erwise arising in connection therewith.
This analysis is being distributed by electronic and ordinary mail to professional investors, who are expected to make their own investment decisions without undue reliance on
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Responsibility for the content of this publication lies with:
a) UniCredit Bank AG, Am Tucherpark 16, 80538 Munich, Germany, (also responsible for the distribution pursuant to §34b WpHG). The company belongs to UCI Group.
Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany.
b) UniCredit Bank AG London Branch, Moor House, 120 London Wall, London EC2Y 5ET, United Kingdom.
Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany and subject to limited regulation by the Financial Ser-
vices Authority (FSA), 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom. Details about the extent of our regulation by the Financial Services Authority
are available from us on request.
c) UniCredit Bank AG Milan Branch, Via Tommaso Grossi 10, 20121 Milan, Italy, duly authorized by the Bank of Italy to provide investment services.
Regulatory authority: “Bank of Italy”, Via Nazionale 91, 00184 Roma, Italy and Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany.
d) UniCredit Bank AG Vienna Branch, Julius-Tandler-Platz 3, 1090 Vienna, Austria
Regulatory authority: Finanzmarktaufsichtsbehörde (FMA), Praterstrasse 23, 1020 Vienna, Austria and subject to limited regulation by the “BaFin“ – Bundesanstalt für Finanz-
dienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany. Details about the extent of our regulation by the Bundesanstalt für Finanzdienstleistungsaufsicht are available
from us on request.
e) UniCredit Securities, Boulevard Ring Office Building, 17/1 Chistoprudni Boulevard, Moscow 101000, Russia
Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia
f) UniCredit Menkul Değerler A.Ş., Büyükdere Cad. No. 195, Büyükdere Plaza Kat. 5, 34394 Levent, Istanbul, Turkey
Regulatory authority: Sermaye Piyasası Kurulu – Capital Markets Board of Turkey, Eskişehir Yolu 8.Km No:156, 06530 Ankara, Turkey
g) UniCredit Bulbank, Sveta Nedelya Sq. 7, BG-1000 Sofia, Bulgaria
Regulatory authority: Financial Supervision Commission (FSC), 33 Shar Planina str.,1303 Sofia, Bulgaria
h) Zagrebačka banka, Paromlinska 2, HR-10000 Zagreb, Croatia
Regulatory authority: Croatian Agency for Supervision of Financial Services, Miramarska 24B, 10000 Zagreb, Croatia
i) UniCredit Bank, Na Príkope 858/20, CZ-11121 Prague, Czech Republic
Regulatory authority: CNB Czech National Bank, Na Příkopě 28, 115 03 Praha 1, Czech Republic
j) Bank Pekao, ul. Grzybowska 53/57, PL-00-950 Warsaw, Poland
Regulatory authority: Polish Financial Supervision Authority, Plac Powstańców Warszawy 1, 00-950 Warsaw, Poland
k) UniCredit Bank, Prechistenskaya emb. 9, RF-19034 Moscow, Russia
Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia
l) UniCredit Bank, Šancova 1/A, SK-813 33 Bratislava, Slovakia
Regulatory authority: National Bank of Slovakia, Stefanikovo nam. 10/19, 967 01 Kremnica, Slovakia
m) Yapi Kredi, Yapi Kredi Plaza D Blok, Levent, TR-80620 Istanbul, Turkey
Regulatory authority: Sermaye Piyasası Kurulu – Capital Markets Board of Turkey, Eskişehir Yolu 8.Km No:156, 06530 Ankara, Turkey
n) UniCredit Tiriac Bank, Ghetarilor Street 23-25, RO-014106 Bucharest 1,Romania
Regulatory authority: CNVM, Romanian National Securities Commission, Foişorului street, no.2, sector 3, Bucharest, Romania
o) ATFBank, 100 Furmanov Str., KZ-050000 Almaty, Kazakhstan
Agency of the Republic of Kazakhstan on the state regulation and supervision of financial market and financial organisations, 050000, Almaty, 67 Aiteke Bi str., Kazakhstan
POTENTIAL CONFLICTS OF INTEREST

UniCredit Bank AG acts as a Specialist or Primary Dealer in government bonds issued by the Italian, Portuguese and Greek Treasury. Main tasks of the Specialist are to partici-
pate with continuity and efficiency to the governments' securities auctions, to contribute to the efficiency of the secondary market through market making activity and quoting re-
quirements and to contribute to the management of public debt and to the debt issuance policy choices, also through advisory and research activities.
ANALYST DECLARATION
The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly.
ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST
To prevent or remedy conflicts of interest, UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit Bank AG Vienna Branch, UniCredit Bank AG Milan Branch,
UniCredit Securities, UniCredit Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank have es-
tablished the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by its compliance department. Conflicts of interest aris-
ing are managed by legal and physical and non-physical barriers (collectively referred to as “Chinese Walls”) designed to restrict the flow of information between one
area/department of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit Bank AG Vienna Branch, UniCredit Bank AG Milan Branch, UniCredit Securities, UniCredit
Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank and another. In particular, Investment
Banking units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries
from Markets Units, as well as the research department. In the case of equities execution by UniCredit Bank AG Milan Branch, other than as a matter of client facilitation or delta
hedging of OTC and listed derivative positions, there is no proprietary trading. Disclosure of publicly available conflicts of interest and other material interests is made in the re-
search. Analysts are supervised and managed on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate fi-
nance activities, or other activities other than the sale of securities to clients.
UniCredit Research page 30

Friday Notes
ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED
Notice to Austrian investors
This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
This document is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in
whole or part, for any purpose.
Notice to Czech investors
This report is intended for clients of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit Bank AG Vienna Branch, UniCredit Bank AG Milan Branch, UniCredit Se-
curities, UniCredit Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank in the Czech Republic
and may not be used or relied upon by any other person for any purpose.
Notice to Italian investors
This document is not for distribution to retail clients as defined in article 26, paragraph 1(e) of Regulation n. 16190 approved by CONSOB on October 29, 2007.
In the case of a short note, we invite the investors to read the related company report that can be found on UniCredit Research website www.research.unicreditgroup.eu.
Notice to Russian investors
As far as we are aware, not all of the financial instruments referred to in this analysis have been registered under the federal law of the Russian Federation “On the Securities
Market” dated April 22, 1996, as amended, and are not being offered, sold, delivered or advertised in the Russian Federation.
Notice to Turkish investors
Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities. Investment advisory services are provided in
accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the cli-
ents. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit
your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely on the information stated here may not result in consequences
that meet your expectations.
Notice to Investors in Japan
This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
Notice to UK investors
This communication is directed only at clients of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit Bank AG Vienna Branch, UniCredit Bank AG Milan Branch,
UniCredit Securities, UniCredit Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank in the
Czech Republic who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unin-
corporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be
communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who are not relevant per-
sons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons.
Notice to U.S. investors
This report is being furnished to U.S. recipients in reliance on Rule 15a-6 ("Rule 15a-6") under the U.S. Securities Exchange Act of 1934, as amended. Each U.S. recipient of this
report represents and agrees, by virtue of its acceptance thereof, that it is such a "major U.S. institutional investor" (as such term is defined in Rule 15a-6) and that it understands
the risks involved in executing transactions in such securities. Any U.S. recipient of this report that wishes to discuss or receive additional information regarding any security or
issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of
UniCredit Capital Markets, Inc. (“UCI Capital Markets”).
Any transaction by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through UCI Capital Markets.
The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. re-
porting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and
reporting standards as U.S. issuers.
The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose.
Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as
amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain inves-
tors depending on their specific investment objectives, risk tolerance and financial position. In jurisdictions where UCI Capital Markets is not registered or licensed to trade in se-
curities, commodities or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to jurisdic-
tion and which may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements.
The information in this publication is based on carefully selected sources believed to be reliable, but UCI Capital Markets does not make any representation with respect to its
completeness or accuracy. All opinions expressed herein reflect the author’s judgment at the original time of publication, without regard to the date on which you may receive
such information, and are subject to change without notice.
UCI Capital Markets may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. These publications
reflect the different assumptions, views and analytical methods of the analysts who prepared them. Past performance should not be taken as an indication or guarantee of future
performance, and no representation or warranty, express or implied, is provided in relation to future performance.
UCI Capital Markets and any company affiliated with it may, with respect to any securities discussed herein: (a) take a long or short position and buy or sell such securities; (b)
act as investment and/or commercial bankers for issuers of such securities; (c) act as market makers for such securities; (d) serve on the board of any issuer of such securities;
and (e) act as paid consultant or advisor to any issuer.
The information contained herein may include forward-looking statements within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors
that could cause a company’s actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic condi-
tions that adversely affect the level of demand for the company’s products or services, changes in foreign exchange markets, changes in international and domestic financial
markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this
cautionary statement
This document may not be distributed in Canada or Australia..

Friday Notes
UniCredit Research*
Thorsten Weinelt, CFA Dr. Ingo Heimig
Global Head of Research & Chief Strategist Head of Research Operations
+49 89 378-15110 +49 89 378-13952
thorsten.weinelt@unicreditgroup.de ingo.heimig@unicreditgroup.de
Economics & FI/FX Research
Marco Annunziata, Ph.D., Chief Economist

+44 20 7826-1770
marco.annunziata@unicreditgroup.eu
Economics & Commodity Research EEMEA Economics & FI/FX Strategy

Global Economics Gyula Toth, Head of EEMEA FI/FX Strategy
Dr. Davide Stroppa, Global Economist +43 50505 823-62, gyula.toth@caib.unicreditgroup.eu
+39 02 8862-2890
davide.stroppa@unicreditgroup.de Cevdet Akcay, Ph.D., Chief Economist, Turkey
+90 212 319-8430, cevdet.akcay@yapikredi.com.tr
European Economics
Matteo Ferrazzi, Economist, EEMEA
Andreas Rees, Chief German Economist +39 02 8862-8600, matteo.ferrazzi@unicreditgroup.eu
+49 89 378-12576
andreas.rees@unicreditgroup.de Dmitry Gourov, Economist, EEMEA
+43 50505 823-64, dmitry.gourov@caib.unicreditgroup.eu
Marco Valli, Chief Italian Economist
+39 02 8862-8688 Hans Holzhacker, Chief Economist, Kazakhstan
marco.valli@unicreditgroup.de +7 727 244-1463, h.holzhacker@atfbank.kz
Stefan Bruckbauer, Chief Austrian Economist Marcin Mrowiec, Chief Economist, Poland
+43 50505 41951 +48 22 656-0678, marcin.mrowiec@pekao.com.pl
stefan.bruckbauer@unicreditgroup.at Vladimir Osakovsky, Ph.D., Head of Strategy and Research, Russia
Tullia Bucco +7 495 258-7258 ext.7558, vladimir.osakovskiy@unicreditgroup.ru
+39 02 8862-2079 Rozália Pál, Ph.D., Chief Economist, Romania
tullia.bucco@unicreditgroup.de +40 21 203-2376, rozalia.pal@unicredit.ro
Chiara Corsa Kristofor Pavlov, Chief Economist, Bulgaria
+39 02 8862-2209 +359 2 9269-390, kristofor.pavlov@unicreditgroup.bg
chiara.corsa@unicreditgroup.de
Goran Šaravanja, Chief Economist, Croatia
Dr. Loredana Federico +385 1 6006-678, goran.saravanja@unicreditgroup.zaba.hr
+39 02 8862-3180
loredana.federico@unicreditgroup.eu Pavel Sobisek, Chief Economist, Czech Republic
+420 2 211-12504, pavel.sobisek@unicreditgroup.cz
Alexander Koch, CFA
+49 89 378-13013 Jan Toth, Chief Economist, Slovakia
alexander.koch1@unicreditgroup.de +421 2 4950-2267, jan.toth@unicreditgroup.sk
Chiara Silvestre
chiara.silvestre@unicreditgroup.de
Global FI/FX Strategy
US Economics Michael Rottmann, Head
+49 89 378-15121, michael.rottmann1@unicreditgroup.de
Dr. Harm Bandholz, CFA
+1 212 672 5957 Dr. Luca Cazzulani, Deputy Head, FI Strategy
harm.bandholz@us.unicreditgroup.eu +39 02 8862-0640, luca.cazzulani@unicreditgroup.de
Chiara Cremonesi, FI Strategy
Commodity Research +44 20 7826-1771, chiara.cremonesi@unicreditgroup.eu
Jochen Hitzfeld Dr. Stephan Maier, FX Strategy
+49 89 378-18709 +39 02 8862-8604, stephan.maier@unicreditgroup.eu
jochen.hitzfeld@unicreditgroup.de
Armin Mekelburg, FX Strategy
Nikolaus Keis +49 89 378-14307, armin.mekelburg@unicreditgroup.de
+49 89 378-12560
nikolaus.keis@unicreditgroup.de Roberto Mialich, FX Strategy
+39 02 8862-0658, roberto.mialich@unicreditgroup.de
Kornelius Purps, FI Strategy
+49 89 378-12753, kornelius.purps@unicreditgroup.de
Herbert Stocker, Technical Analysis
+49 89 378-14305, herbert.stocker@unicreditgroup.de
Publication Address
UniCredit Research
Corporate & Investment Banking Bloomberg
UniCredit Bank AG UCGR
Arabellastrasse 12
D-81925 Munich Internet
Tel. +49 89 378-18927 - Fax +49 89 378-18352 www.research.unicreditgroup.eu
*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit CAIB Group (UniCredit CAIB), UniCredit Securities (UniCredit Securities),
UniCredit Menkul Değerler A.Ş. (UniCredit Menkul), UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank and ATFBank.

JUL 16 UniCredit Friday Notes

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JUL 16 UniCredit Friday Notes

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16 July 2010 Economics & FI/FX Research

Head of Economics & FI/FX Research

UniCredit Research page 1 See last pages for disclaimer.

A startling comeback Be that as it may, we have a paradoxical situation where,

UniCredit Research page 2 See last pages for disclaimer.

All we will learn in a week’s time will be the aggregate results

Marco Annunziata, Ph.D. (UniCredit Bank)

UniCredit Research page 3 See last pages for disclaimer.

PLANNED BUDGET CONSOLIDATION IN 2011, IN % OF GDP

2011 2012 2013 2014

UniCredit Research page 4 See last pages for disclaimer.

probably still climb to over EUR 100bn or close to 4½% of 15

GDP (cf. chart). 10

OVERALL BUDGET BALANCE, IN EUR BN 0

Federal government States

next column). -80

Source: Federal ministry of finance, UniCredit Research

UniCredit Research page 5 See last pages for disclaimer.

Consolidation plan appropriate

Alexander Koch, CFA (UniCredit Bank)

UniCredit Research page 6 See last pages for disclaimer.

States’ budget plight will continue 5

On 1 July, fiscal 2011 began in 46 of the 50 US states. And

recovery lagged behind the economic improvement: While,

UniCredit Research page 7 See last pages for disclaimer.

HUGE BUDGET GAPS AUSTERITY MEASURES HURT GROWTH

Source: CBPP, UniCredit Research

spending before the onset of the crisis, making them the

length of the recession means that even these reserves have

plug their budget gaps even more strongly via adjustments to

numbers provide a foretaste of the possible ramifications.

of the states and local authorities have fallen in five of the

As stated, all these steps were necessary in the past months

UniCredit Research page 8 See last pages for disclaimer.

UniCredit Research page 9 See last pages for disclaimer.

Source: PEW Center, Novy-Marx and Rauh, UniCredit Research

Hopes pinned on Washington

UniCredit Research page 10 See last pages for disclaimer.

IEA CONSUMPTION ESTIMATE REVISED UP BY ALMOST 3 MB/D!

Nevertheless, it is not possible to sound the all-clear for

strong growth in emerging markets.

■ OPEC’s free production capacity remains very high. It is 82

fields, cover the growth of emerging markets and smooth

■ The report does, however, also reveal three weak spots.

Every year at the end of June, the International Energy

years. The report is then updated each December. An initial 5

to and including 2014, demand is expected to increase from 3

Source: IEA MTOMR 2010, UniCredit Research

The scenario does, however, have one important weak spot:

UniCredit Research page 11 See last pages for disclaimer.

fields is a major strain 0.2 0.1

OPEC surplus holds oil price in check

UniCredit Research page 12 See last pages for disclaimer.

OPEC’s unofficial target price is USD 70-80 per barrel, and

OPEC’S HIGH FREE PRODUCTION CAPACITY KEEPS OIL

Source: Bloomberg, UniCredit Research

Jochen Hitzfeld (UniCredit Bank)

UniCredit Research page 13 See last pages for disclaimer.

Data Monitor Europe – Preview of the coming week

July CIB Cons. June May 65

Source: Thomson DataStream, UniCredit Research

FRANCE, BUSINESS CONFIDENCE THE PEAK SHOULD BE BEHIND US

July CIB Cons. June May 120 40

Manufacturing confidence is likely to move sideways in July,